Post on 31-Mar-2018
ACCOUNTING FOR AND AUDIT OF PROPERTY, PLANT AND EQUIPMENT
PRESENTED BY
SOLOMON SIMEON MANAGER: PEAK PROFESSIONAL SERVICES
IN HOUSE SEMINAR SERIES NO 2
PEAK PROFESSIONAL SERVICES
(CHARTERED ACCOUNTANTS)
NIGERIA
A member of Kreston International | A global network of independent accounting firms
CHAPTER 1
Introduction
Property, Plant and Equipment (generally called fixed assets) are those tangible resources of a business that have the following characteristics:
1. Are not bought primarily to be resold
2. Are to be used in the business and 3. Are expected to be used for a long time. (More than one year)
Examples are Land and Buildings, Plant and Machinery, Equipment and Furniture.
Property, Plant and Equipment usually constitute a significant proportion of most company’s balance
sheet though the actual proportion varies from company to company depending on their nature of business.
This paper presents the procedure for Accounting for items of Property, Plant and Equipment (Fixed
Assets) and the procedures to be followed when carrying out an audit exercise on the items.
This paper is important for a number of reasons:
Fixed Assets constitute large proportion of the balance sheet of most of our clients
Fixed Assets require special accounting treatment because they are bought at a particular time
and their use is spread over a number of years
If appropriate audit procedures are not used, we may arrive at a wrong conclusion with the result that our audit opinion may also be wrong.
It is hoped that members of staff would be able to understand and apply the accounting and audit procedures required for fixed assets at the end of this paper.
The topics covered in this paper are as follows:
Relevant Accounting standards for fixed asset accounting
Accounting for Fixed Asset Acquisition
Accounting for Fixed Asset Depreciation Accounting For Fixed Asset Disposal
Accounting for Fixed Assets Revaluation
Sundry Accounting issues Audit of Fixed Assets- General Procedures
Understanding the Company’s fixed asset system
Audit of Additions Audit of Disposal
Audit of Depreciation
Disclosure requirements
Conclusion
ACCOUNTING STANDARDS
In Nigeria, Fixed Assets are accounted for using the Statement of Accounting Standard (SAS) 3
(Accounting for Property, Plant and Equipment). As we know SASs are issued by the Financial
Reporting Council of Nigeria formerly known as the Nigerian Accounting Standards Board).
This position is expected to change from this year (2013) when companies with significant public
interest are expected to convert from using the SAS to the International Financial Reporting Standards (IFRS). Most of our big clients (with Turnover of over ₦500Million) are in this category.
We shall therefore also be looking at the Accounting treatment of Fixed Assets from the perspective
of the International Financial Reporting Standards (IFRS). The relevant IFRS in accounting for Fixed Assets are:
IAS 16 Property, Plant and Equipment, IAS 20 Government grants,
IAS 40 Investment Property,
1AS 36 Impairment of assets, IAS 23, Borrowing Costs.
We shall however restrict ourselves to IAS 16 in this paper. Others will be treated in due course.
Accounting for Fixed Assets Acquisition Please note that under IFRS, the name for Fixed Assets is Non Current Asset. So if accounts are
prepared under the IFRS, we use the term Non Current Asset, while under the Nigerian SAS we use
the term Fixed Asset.
An item of PPE can be acquired by two means;
1) Purchase or 2) By self construction.
Such acquired asset is initially recorded in the books of accounts at its Historical cost.
Components of cost
The components of cost of an item of PPE include:
Purchase price less trade discount or rebate
Import duties and non-refundable purchase taxes
Directly attributable costs of bringing the asset to working condition for its intended use, e.g.:
The cost of site preparation
Initial delivery and handling costs
Installation costs Testing
Professional fees (architects, engineers, etc.)
Initial estimate of the unavoidable cost of dismantling and removing the asset and restoring
the site on which it is located.
In the case of self-constructed assets, the same principles are applied as for acquired assets; the cost of
the asset will be the cost of its production. Abnormal costs (wasted material, labour or other
resources) are excluded from the cost of the asset. An example of a self-constructed asset is when a building company builds its own head office.
Example 1:
Wakabout Ltd, with 31st December year end, bought a motor van costing ₦1,000,000 on 1st July,
2011 for its marketing team and paid ₦200,000 as import duty, while the company was given a trade
discount of 10%. Show the accounting entries.
Accounting entries:
Both the Nigerian GAAP and the International GAAP will treat this situation in the same way, the
difference basically will be in names of statements and terms as follows:
Under the Nigerian GAAP and IFRS
On 1st July, 2011
Debit Motor Van ₦900,000
Debit Motor Van ₦200,000
Credit Bank ₦1,100,000
Lets us now assume that Wakabout Ltd is a company that can make the VAN on its own. The
Accounting entries will be different because it is the cost component that will now be accumulated to
arrive at the cost of motor VAN.
The Debit Side will include
Cost of Steel and Iron Rods
Cost of Wages of Direct Labour for Production
Cost of Directly attributable overhead
While we credit our supplier and/ or Bank
ACCOUNTING FOR DEPECIATION
Depreciation is that part of the original cost of a non current asset (fixed assets under NGAAP) that is
consumed during its period of use in the business.
In this paper we are concerned with the Accounting treatment as all members of staff are expected to
have known how it is calculated.
When depreciation is calculated the accounting entries are:
Debit Depreciation Account and Credit Accumulated Depreciation Account.
Example: 2
Wakabout Ltd, with 31st December year end, bought a motor van costing ₦1,000,000 on 1st July,
2011 for its marketing team. Estimated useful life of the Van is 5 years with residual value of
₦200,000. The company policy is to depreciate its depreciable assets on straight line basis.
Both the Nigerian GAAP and the International GAAP will treat this situation in the same way, the
difference basically will be in names of statements and terms as follows:
Under the Nigerian GAAP
On 1st
July, 2011
Debit Motor Van ₦1,000,000
Credit Bank ₦1,000,000
On 31st December, 2011
Debit Depreciation Expense ₦80,000 Credit Accumulated Depreciation ₦80,000
Debit P & L Account ₦80,000
Credit Depreciation Expense ₦80,000
Balance sheet as at 31st December, 2011
Fixed Assets Schedule
Motor Van ₦1,000,000 Less Accumulated Depreciation ₦80,000
Net Book Value ₦920,000
Under the International GAAP
On 1st July, 2011
Debit Motor Van ₦1,000,000
Credit Bank ₦1,000,000
On 31st December, 2011
Debit Depreciation Expense ₦80,000
Credit Accumulated Depreciation ₦80,000
Debit Profit or Loss (Statement of Profit or Loss and other Comprehensive Income) ₦80,000
Credit Depreciation Expense ₦80,000
Statement of Financial Position as at 31st December, 2011
Property, Plant and Equipment Schedule
Motor Van ₦1,000,000
Less Accumulated Depreciation ₦80,000 Less Impairment Loss 0
.....................
Carrying value ₦920,000 ===========
If in our Example 1, recoverable amount is known and different from the asset’s carrying value, then
impairment loss will be recognised.
Example 3:
As in Example 2:
Wakabout Ltd, with 31st December year end, bought a motor van costing ₦1,000,000 on 1st July,
2011 for its marketing team. Estimated useful life of the van is 5 years with ₦200,000 residual value. The company policy is to depreciate its depreciable assets on straight line basis.
But at 31st December, 2011, the recoverable amount of the asset is found to be ₦900,000
Accounting entries:
Under the Nigerian GAAP
On 1st
July, 2011
Debit Motor Van ₦1,000,000
Credit Bank ₦1,000,000
On 31st December, 2011
Debit Depreciation Expense ₦80,000
Credit Accumulated Depreciation ₦80,000
Debit P & L Account ₦80,000
Credit Depreciation Expense ₦80,000
Debit P & L Account ₦20,000
Credit Impairment Loss ₦20,000
Balance sheet as at 31st December, 2011
Fixed Assets Schedule
Motor Van ₦1,000,000
Less Accumulated Depreciation ₦80,000
Net Book Value ₦920,000 Less Impairment Loss ₦20,000
Carrying value ₦900,000
Under the International GAAP
On 1st July, 2011
Debit Motor Van ₦1,000,000
Credit Bank ₦1,000,000
On 31st December, 2011
Debit Depreciation Expense ₦80,000
Credit Accumulated Depreciation ₦80,000
Debit Profit or Loss (Statement of Profit or Loss and other Comprehensive Income) ₦80,000 Credit Depreciation Expense ₦80,000
Debit Profit or Loss (Statement of Profit or Loss and other Comprehensive Income) ₦20,000 Credit Impairment Loss ₦20,000
Statement of Financial Position as at 31st December, 2011
Property, Plant and Equipment Schedule
Motor Van ₦1,000,000
Less Accumulated Depreciation ₦80,000
Less Impairment Loss ₦20,000
..................... Carrying value ₦900,000
===========
Methods of measuring Fixed Assets
There are two possible treatments here, essentially a choice between keeping an asset recorded at cost
or revaluing it to fair value.
Revaluation model
Cost Model
All the explanations and examples given earlier relate to cost model.
Revaluation Model
This basically has to do with bringing an asset to its fair value in the balance sheet or statement of financial position. Importantly, when a fixed asset is revalued, the whole class of assets to which it
belongs should be revalued.
Upward Revaluation
If the initial revalued amount of an asset is greater than its carrying amount (under International
GAAP) or net book value (under Nigerian GAAP), the accounting treatment will be to debit the asset account and credit revaluation surplus with the amount of increase. If afterwards the value drops, then
revaluation surplus account is debited (if the drop is more than the balance in the revaluation surplus
account, then the balance is debited to Profit and Loss (SASs) or Profit or Loss (IFRSs)) and the asset account credited with the amount of the drop.
Example 3:
An asset acquired, by an entity with 31st December year end, on 1st January, 2010 at a cost of ₦300,000 with a useful life of 4 years was revalued to ₦200,000 on 31st December, 2011 and to
₦40,000 on 31st December, 2012.
Accounting entries on 31st December, 2011:
Cost Model
Carry the asset at its cost less any
accumulated depreciation and any
accumulated impairment loss.
Revaluation Model
Carry the asset at a revalued amount,
being its fair value at the date of the
revaluation less any subsequent
accumulated depreciation and subsequent
accumulated impairment loss.
Revaluations shall be made regularly
enough so that the carrying amount
approximates to fair value at the reporting
date.
Debit Asset value ₦50,000
Credit Revaluation surplus ₦50,000
Accounting entries on 31st December, 2012:
Under Nigerian GAAP
Debit Revaluation surplus ₦50,000
Debit Profit and Loss ₦10,000
Credit Asset Value ₦60,000
Downward Revaluation
If the initial revalued amount of an asset is less than its carrying amount (under International GAAP)
or net book value (under Nigerian GAAP), the revaluation decrease is treated in the same way as
impairment loss i.e. the decrease should be recognised as an expense. Debit Profit and Loss (SASs) or Profit or Loss (IFRSs) and credit the asset account with the amount of decrease. However, a
revaluation decrease (or impairment loss) should be charged directly against any related revaluation
surplus to the extent that the decrease does not exceed the amount held in the revaluation surplus in respect of the same asset.
A reversal of an impairment loss should be treated in the same way as a revaluation increase i.e. a revaluation increase should be recognised as income to the extent that it reverses a revaluation
decrease or an impairment loss of the same asset previously recognised as an expense.
An asset cannot be revalued to a carrying amount that is higher than its value would have been if the asset had not been impaired originally i.e. its depreciated carrying value had the impairment not taken
place. An exception to this rule is goodwill. Reversal of impairment loss is not allowed for goodwill.
Revaluation model can only be used if the fair value of the asset can be determined reliably.
Example 4:
An asset acquired, by an entity with 31st December year end, on 1st January, 2010 at a cost of
₦300,000 with a useful life of 4 years was revalued to ₦100,000 on 31st December, 2011.
Accounting entries on 31st December, 2011:
Debit Profit and Loss ₦50,000 Credit Asset value ₦50,000
Revaluation and depreciation
When an asset is revalued upwards, the depreciation charge will increase. Normally, a revaluation
surplus is only realised as the asset is sold, but when it is being depreciated, part of that surplus is being realised as the asset is used. The amount of the surplus realised is the difference between
depreciation charged on the revalued amount and the (lower) depreciation which would have been
charged on the asset’s original cost. The entity can then choose to transfer this amount to retained
(i.e. realised) earnings but not through the statement of profit or loss.
Example 5:
Asset cost in year 1 = ₦10,000. Useful life = 5 years. Revaluation in year 3 = ₦12,000. No change in
useful life after revaluation.
Accounting entries:
Debit Asset value ₦6,000
Credit Revaluation surplus ₦6,000
Debit Revaluation surplus ₦2,000
Credit Retained earnings ₦2,000
Disclosure An accounting policy note should disclose the valuation bases used for determining the amounts at
which depreciable assets are stated along with the other accounting policies. IAS 16 requires the
following to be disclosed for each major class of depreciable assets:
Depreciation methods used
Useful lives or the depreciation rates used
Total depreciation allocated for the period
Gross amount of depreciable assets and the related accumulated depreciation
Retirement and disposals
When an item of PPE is permanently withdrawn from use or sold or scrapped and no future economic benefits are expected from its disposal, it should be withdrawn from the statement of financial
position. Any revaluation surplus in respect of a fixed asset disposed may be taken from the
revaluation surplus account to retained earnings.
The procedure for this is as follows:
When a fixed asset (non current asset) is sold you open an asset disposal account and transfer
the cost price of the asset sold to the asset disposal account.
This is done by Debit to the asset disposal account and
Credit to the Asset Account
Transfer the depreciation already charged on the asset to the asset disposal account.
This is done by Debit to the Accumulated Depreciation Account and Credit to the Asset Disposal Account
For the sales proceeds received we
Debit our bank and Credit our asset disposal account
Close the asset disposal account to the Profit and Loss Account. This is done as follows:
If the asset disposal account shows a difference on the debit side, then there is a profit on the
sale. Debit asset disposal account and Credit Profit and Loss Account
If the asset disposal account shows a difference on the credit side, there is a loss on sale:
Debit profit and loss account
Credit asset disposal account
These entries can be illustrated by using the example below.
Example 6:
A fixed asset was purchased on 1st January, 2010 at a cost of ₦300,000 with useful life of 5 years and
nil residual value. On 31st December, 2012, the asset was sold for ₦100,000.
Accounting entries on 31st December, 2012:
Debit Assets Disposal ₦300,000
Credit Fixed Assets ₦300,000
Debit Accumulated Depreciation ₦180,000
Credit Assets Disposal ₦180,000
Debit Bank ₦100,000
Credit Assets Disposal ₦100,000
Debit Profit & Loss ₦20,000
Credit Assets Disposal ₦20,000
Example 7:
A fixed asset was purchased on 1st January, 2010 at a cost of ₦500,000 with useful life of 5 years and nil residual value. On 31st December, 2011 it was revalued to ₦450,000 and was sold on 31st
December, 2012 for ₦350,000
Accounting entries on 31st December, 2012:
Debit Assets Disposal ₦300,000
Credit Fixed Assets ₦300,000
Debit Bank ₦350,000
Credit Assets Disposal ₦350,000
Debit Assets Disposal ₦50,000
Credit Profit & Loss ₦50,000
Debit Revaluation surplus ₦150,000
Credit Retained earnings ₦150,000
SUNDRY ISSUES ON FIXED ASSETS
For further reading on the topic members of staff are strongly advised to be familiar with the following literatures:
Business Accounting Book 1 by Frank Wood, Chapters 26 and 27 SAS 3 Accounting for property, Plant and Equipment
IAS 16 Property, Plant and Equipment,
IAS 20 Government grants, IAS 40 Investment Property,
1AS 36 Impairment of assets,
IAS 23, Borrowing Costs.
AUDIT OF FIXED ASSETS (NON CURRENT ASSETS)
OBJECTIVES
The Audit of fixed assets is centred on the following objectives:
To ensure that all fixed assets exist, are owned by the company and are in use
To ensure that all fixed assets are recorded in the books, at the correct valuation, are adequately secured and properly maintained
That acquisitions and disposals are properly authorized
That assets are properly depreciated and the depreciation is properly accounted for
REQUIRED KNOWLEDGE
Before embarking on the audit of fixed assets you must note the following in your working papers. Fixed Asset Capitalization Policy
Depreciation Policy and Rate of depreciation
Acquisition Policy (Who authorizes the purchase of fixed asset) Disposal Policy (Who authorizes disposal)
This information can be gotten from company manual, interview with members of staff, previous year working papers and previous Audited Financial Statements
REQUIRED TESTS
1) Analytical procedures
2) Verify Opening Balances
3) Verify Current year acquisitions 4) Verify Current year disposals
5) Verify the ending balance in the asset account
6) Verify depreciation expense
7) Verify accumulated depreciation balance
REQUIRED PROCEDURES
Obtain a list of fixed assets at year end with comparative figures for previous year.
S/N REQUIRED ACTION OUR
AUDIT TICK
IMPLICATIONS
OF ACTION
FURTHER
WORK
1 Agree comparative
figures with previous year working papers
and financial statements
β
We have verified
opening balances for each category of
asset
If it is agreed
no further work is
required. If
not let the
client explain
2 Agree the list to the
asset register, trial
balance and draft accounts
Ł
We have verified
closing balances of
depreciation and asset accounts and
confirmed that it
agrees with clients
books of accounts
If it is agreed
no further
work is required. If
not let the
client explain
3 Perform Analytical
Procedures: This means that you should
calculate the following
ratios.
a) Calculate
depreciation expense as
a percentage of carrying value of assets and
compare with previous
year
b) Calculated
accumulated depreciation divided by
gross asset value and
compare with previous
year
c) Compare
maintenance expenses with previous year
No tick.
We prepare a
table
a) If you observe
significant
difference do a
detailed test on depreciation
b) If you observe
significant
difference do a detailed test on
depreciation
c) If you observe
significant difference with
previous year you
will have to prepare an analysis of
maintenance
expenses to
determine whether fixed assets are not
included
If you cannot
draw
conclusion,
ask the client to provide
explanation
This analysis must be in a
separate
worksheet which must be
properly titled
4 Verification of
additions
1) Obtain a schedule of all additions suitably
classified into asset
categories. Agree the totals to the fixed asset
schedule given to you
earlier
2) Select a sample of
items that you wish to
check the additions.
3) Inspect vendors
invoices and supporting
documents for the transaction
4) Check the vouchers
Ł
µ
ᾆ
You know that the schedule you are
working on is the
correct one
for authorisation to
acquire the assets
5) Confirm that the
asset is properly classified
6) For land and Buildings inspect title
documents, deeds and
lease agreements
ȡ Ҫ
All these
documents
should be
copied and kept in our
file
7 Take a sample of
material asset (both
additions and balance
brought forward) and physically inspect them
We would now use our standard file divider for the other procedures.
FIXED ASSETS AND ACCUMULATED DEPRECIATION AUDIT PROCEDURE
Initial W/P Ref.
1. Obtain and check or prepare for each assets group
schedule of cost and depreciation for years agreeing with Balance Sheet.
2. (a) Obtain and check or prepare additions schedules.
(b) Obtain and check or prepare disposals schedules.
(c) Check or prepare Profit and Loss on disposals schedules.
3. (a) Vouch significant additions and disposals and indicate on schedules how you have done so.
(b) Reconcile Additional, Disposal and Proceeds
of Sales with Capital Allowances Schedule.
4. Check against Fixed Assets Register.
5. Physically verify wherever possible and indicate on
schedules and/or check physical inventories prepared
by client.
6. (a) Examine and list title deeds or obtain
confirmation from authorized holder.
(b) Note changes against any group of assets.
7. Check and list insurance policies, ensure insurance
cover is adequate.
8. Check that depreciation rates are adequate, not excessive and consistent with prior year. Consider note to
Accounts if not.
9. Review appropriate expense accounts to ensure no
capital items charged to revenue.
10. Ascertain amount of capital commitments outstanding
at Balance Sheet date.
11. Get certificate signed.
10/A Client:
Address :
CERTIFICATE OF CAPITAL EXPENDITURE AND DISPOSALS OF FIXED ASSETS
YEAR ENDED:
Additions Disposals
Land .. .. .. .. ..
Building .. .. .. ..
Plant and Machinery .. .. ..
Motor Vehicles .. .. ..
Fixtures, Fitting and Equipment ..
Office Furniture .. .. ..
Other Fixed Assets .. .. ..
----------------- --------------- ₦ ₦
========== =========
I HEREBY CERTIFY that, to the best of my knowledge and belief:
(1) The capital expenditure during the year ended on the above date amounted to ₦
as summarized above, and that such expenditure represented additions or improvements to the Company’s Fixed Assets during the period stated.
(2) No fixed assets were sold, scrapped or otherwise disposed of during the year, except those
having a book value (before deducting accumulated depreciation) of ₦ as shown above and which realized ₦
(3) Provision has been made at the above date for writing down to estimated realizable values all
fixed assets considered to be obsolete and of no further use.
(4) At the above date commitments for capital expenditure not included in the accounts to that
date amounted to approximately ₦ and capital expenditure authorized by the directors but not contracted for amounted to approximately ₦
Date………………………………. ………………………… (Signature) ………………………. (Office)
PEAK PROFESSIONAL SERVICES
CHARTERED ACCOUNTANTS
NIGERIA
CASE STUDY